Small Firms Wait for a Credit Thaw

Big companies are rushing to issue stocks and bonds to suddenly hungry investors. But credit is still scarce for thousands of mostly smaller companies that rely on bank lending.

U.S. corporations such as Ford Motor Co. and MGM Mirage Inc. raised more than $34 billion by selling stock in the first two weeks of May. At around the same time, Bill Mulrooney, chief financial officer of UniFoil Corp., was setting aside plans to borrow money for new equipment that the company had hoped would boost sales.

"I hear about the credit markets' freeing, but it's clearly not the case for small businesses," Mr. Mulrooney says.

UniFoil, a Fairfield, N.J., packaging maker with about $35 million a year in revenue, has been unsuccessfully shopping since January for a $2 million loan to buy equipment that would allow it to offer new features. J.P. Morgan ChaseJPM-0.74% & Co. and other big banks declined. Smaller finance companies asked UniFoil, which posted losses in 2008 and 2009, to pay an $800,000 "deposit" to secure the loan.

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"That defeats the purpose of what we're trying to do," Mr. Mulrooney says. "We're trying not to tie up capital."

J.P. Morgan spokesman Tom Kelly said the bank continues to make loans using "disciplined and sound lending standards."

Other small businesses are in similar straits as banks rein in credit and rebuild their capital bases. The lack of credit is weighing on a main source of U.S. jobs and hurting companies that buy equipment and other products from companies further up the food chain.

Consider Cleveland-based Parker-Hannifin Corp.PH0.15% It boasts an untapped credit line of $1.5 billion, but CFO Timothy Pistell says the inability of Parker's customers to get loans in recent months has contributed to a collapse in demand for its hydraulic equipment, used on everything from bulldozers to airplanes.

"If it's easing, it's not showing up in a positive way in our order book," Mr. Pistell says. "I just don't think banks -- with all these stress tests going on -- are yet willing to lend."

The Federal Reserve's April survey of bank loan officers found that 40% of U.S. banks had tightened standards for commercial and industrial loans since January. Nearly 70% of respondents said they had raised interest rates on credit lines. That's fewer banks than said they had tightened lending standards in the January survey. But only one of the 53 banks responding said it eased standards or loan terms.

"What we're seeing is a return to more rational pricing of risk," says Bob Eisenbeis, chief monetary economist for Cumberland Advisors and former research director at the Federal Reserve Bank of Atlanta.

Michael Porcelain, CFO of Comtech Telecommunications Corp.CMTL3.63%, knows from experience that capital markets can be more welcoming now than banks. Earlier this year, the Melville, N.Y., telecom-equipment maker unsuccessfully sought a five-year line of credit.

Instead, on May 8, Comtech, whose shares trade on Nasdaq, raised $200 million by selling investors notes that can be converted into stock and pay 3% interest. The notes provided "financing from equity investors that we could not get from the banks today," Mr. Porcelain says.

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Comtech, with revenue of $562 million in the fiscal year ended July 31, wants the money for potential acquisitions and to solidify its access to capital in an uncertain economy. "Who knows what the economy is going to be like for the next 12 to 18 months?" Mr. Porcelain says.

To be sure, banks are lending millions daily, and some companies say they're winning better terms than in years past. Joe Peregman, owner of Ocean Tents & Party Rentals in Mount Holly, N.J., says he recently obtained a $150,000 equipment loan and refinanced a $780,000 loan on a building from PNC Financial Services Group Inc.,PNC-0.50% at rates one to two percentage points lower than he had been paying.

But Mr. Peregman says it took longer to win approval for the loans -- three to four months, compared with three to six weeks prior to the financial crisis. The delay "is holding up a lot of work we wanted to have accomplished," he says.

Companies with fewer than 500 employees account for more than half the country's nonfarm private gross domestic product and about half of all private-sector employment, according to the U.S. Small Business Administration's Office of Advocacy. They also rely heavily on credit cards and bank loans for financing.

But small businesses traditionally represent a riskier segment of the lending business, says Bob Seiwert, head of the American Bankers Association's Center for Commercial Lending and Business Banking.

Many companies continue to struggle to obtain credit. Designed Alloy Products Inc. is looking for $6.5 million to outfit a Chattanooga, Tenn., factory it bought in late 2007. Designed Alloy Products, a closely held Aurora, Ill., maker of nickel- and cobalt-based alloys with 2008 revenue of $72 million, purchased the building and began the renovation based on an oral agreement in late 2007 with Merrill Lynch & Co., its longtime lender.

Designed Alloy Products CFO Kevin Maher says Merrill last summer said it would provide financing for only half of the project, which included a $1.5 million mortgage, renovations and new equipment.

"Merrill told us to jump, and sort of let go of the bungee cord," Mr. Maher says.

Mr. Maher then approached Harris N.A., a Chicago-based banking unit of Toronto-based BMO Financial Group, which grew wary when Designed's sales slumped late last year. It ultimately offered a loan backed by all of Designed's $17 million in assets, including land, buildings and equipment.

The deal stalled in March when Harris asked Mr. Maher for additional financial reports. Mr. Maher is looking for another potential lender, while the Chattanooga plant sits idle.

A Harris spokesman declined to comment on specific customers, but says the bank "has a strong record of lending to small and medium-sized businesses." A Merrill spokesman also declined to comment on Designed, but says it tries to "create financing based on current market conditions."

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